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A Modern Greek Tragedy

I believe it was Winston Churchill who said something to the effect that, as a political system, democracy was not perfect, but it was the best available.  Ironically, on the one hand, the situation – i.e .the election result – we can observe in Greece (which is renowned as the cradle of democracy) is a near perfect example of democracy in action.  However, having watched this particular Greek tragedy unfold over the past few years, and more particularly over the past few months, culminating in the success of the left wing Syviza Party at the Greek ballot box, a couple of things have occurred to me as I have, over the past few weeks, considered the Euro-Hellenic confrontation.

Firstly, I was reminded (having recently watched a somewhat mediocre movie about the subject) of the heroic stand of the Greeks, led by Themistocles, against the might of Persia, led by Xerxes, who was a champion of leading from behind and would never have understood the concept of democracy.  After a fine start to the campaign and a disastrous middle, in the end, Themistocles defeated the Persians, despite overwhelming odds – at the battle of Salamis, almost 2600 years ago.

Today Greece again appears to have taken on overwhelming odds – this time represented by a truly mountainous debt (€315 BILLION) and an undemocratic, dictatorial bureaucracy, in the form of the Troika, including the EU Commission and the IMF, who imposed a very Draconian austern regime upon all Greeks.

The main difference between these two examples is that Greece did borrow untold billions from the EU, which loan was stumped by the taxpayers across Europe, who had no say in this deal.  It is understandable that those taxpayers, or representatives of those taxpayers, are not keen to waive the debt: after all, why should a hard working cobbler in Liege have to pay off the debts of a band of profligate, undisciplined Greeks to whom “tax” has, for generations, represented an unacceptable three letter word.

Alexis Tsipras, the new Greek Prime Minister and leader of the Syviza Government, was elected on the mandate that he would renegotiate the debt, which does not appear to be something that the other European leaders wish to get involved in.  Having been quite aggressive in his rhetoric, some sense of a diplomatic compromise has emerged from statements of ministers in his government.  However, at the same time, an implied threat also emerged when Mr Tsipras invited the Russian Ambassador, Andrey Maslov, to be the first foreign representative to the Maximos Mansion in Athens on Monday.  Mr Tsipras has already highlighted the close relationship between the Greek and Russian Orthodox Church and also spoken out against the sanctions imposed against Russia in relation to the Ukraine debacle. This has definitely upset many in the EU who have sought to and, to date, have achieved a consensus amongst European leaders with regard to these sanctions.  There are many who believe that Mr Tsipras’ actions are as much to do with trying to pressurize (blackmail) the EU into an acceptable compromise over the debt with Greece as it is to Greece’s existing and/or potential affiliations with the Russians.

Brussels is even more disturbed by the suggestion that Mr Putin may offer Greece loans to offset part or all of the EU’s debt. That would be uncomfortable in itself, but Russia will milk Mr Tsipras’ political manoeuvrings for all they are worth and it matters not to Mr Putin whether he supports left wing protagonists in Greece, or a right winger like Ms LePen in France, providing it causes dissention in Europe in particular and the West in general.  Even more disturbing however are the rumours that Vlad will demand, as a consideration for financial aid, the right to use Piraeus as the home port for the Russian Mediterranean fleet.

The second thing that occurred to me when I was considering all this is that, whether the Greeks are successful, partially successful, or a total failure in their negotiations with regard to the loans, nobody knows what the result will be or the knock-on effect that it will have on Western Europe’s and indeed the rest of the World’s economies.  If the negotiations are a total failure then the choice would appear to be either accept that situation or leave the Eurozone and Mr Tsipras has suggested that Greece would be better out of the Eurozone than in trying to honor its debts.  All this breeds uncertainty and that uncertainty is further exaggerated by the fact that nobody seems to know what the effect of Greece leaving the Eurozone really would be.

There are those who say that Greece is a mere pimple on the European body and one that can be ignored whilst Greece restructures itself.  Whereas on the other hand, there are those who believe that the knock on effect of Greece leaving the Eurozone could be the subsequent departure of Portugal, Spain, Italy and perhaps even Ireland and France.  There is little doubt that taxpayers in Italy and Spain will not feel inclined to pay back their debts if Greece has got away with it, whether by leaving the Eurozone or entering a compromise with the European Union, whereby part or all of that debt is forgiven.  If the Greeks are able to do it, why can’t the Spanish and the Italians?

Whatever the result may be, all this comes under the label of “unknown collateral consequences”, however what is clear is that the result will be quite cataclysmic and generate substantial volatility, none of which will be good for the man in the street. The lack of certainty is exaggerated by the volatility both in the oil price and the currency markets – particularly the Euro-Dollar spread – and is endorsed by the fact that so many leading economists and pundits have totally different views as to what the effect will be.

Of course uncertainty in the markets is nothing new, nor are surprises “out of left field”, as our American friends might say. A perfect example of such a surprise was the recent action by the Swiss National Bank (SNB) – which takes me on a tangent:

Many commentators in the media, as well as several apparently sophisticated investors, vociferously complained about the SNB’s action, even accusing its management of lying and therefore no longer trustworthy or credible, because, when asked in public, the SNB denied that it planned to lift the cap. I am of the belief that those who complained were either very naïve, very stupid, or perhaps have some other agenda. The markets’ reaction was dramatic enough when the announcement was made, but imagine the chaos if the SNB had replied “Yes, we plan to lift the cap next Tuesday”.  There are times (and this was one) where I accept – even expect – that national leaders, government spokesmen and senior management of corporations have no option but to be “economical with the truth”, unless they can just ignore the question, which was not the case this time.  And we all know that in these type of situations “No Comment” means, or is taken to mean, – “The answer is “Yes”, but I cannot confirm it”.

So with that off my chest, back to Greece.

As I have said, there are 3 possible outcomes to Mr Tsipras’ negotiations – capitulation by him, capitulation by the EU, or a compromise.   My expectation is that probably there will be a compromise of one sort or another, but I do accept that there is a strong possibility that Mr Tsipras will stick his heels in – after all that is his clear mandate – in which case, the rest of the community may well force Greece to return to the wilderness and the Drachma.  But whatever the outcome, there is a total lack of consensus as to how the European or indeed the World’s markets will be effected and even the really sophisticated investors are confused as to what they should do, not just to place themselves into profitable investments, but, more importantly, to protect their assets today.  Furthermore, Mr. Draghi’s efforts of QE are not helping the situation, anymore than the collapse in the oil price or reduced economic activity in China.  And once again, the Chinese have hit the nail where it hurts when they say “We live in interesting times”.

Two things that we can be sure of are that, whatever happens, there will be a period of very disruptive and volatile markets, on the one hand. On the other hand, the situation (actual or perceived) will change on a daily basis.  This is exacerbated when two well respected broad sheets concentrate on two different aspects, albeit commenting on the same story.

The FT reported that “European officials were worried about Greece’s brinksmanship over its bail out” or rather Greece’s new Finance Minister, Yanis Varoufakis’s, brinksmanship.  This follows Mr Varoufakis’s announcement that Greece will refuse any further loans from international lenders, but still expected Mr Draghi to prop up Greece’s seriously creaking banking system (although this has upset EU officials, it may be an intentional or unintentional shot across Mr Putin’s bows). And then, the Irish Times reported this morning that Mr Tsipras had “moved to calm concerns” over his announced strategy and vowed not to act “unilaterally” over Greece’s €315 billion debt.

This is the perfect hunting ground for hedge funds, providing the hedge fund managers, all of whom are much brighter than I am, know what is going on, and particularly what is going up and what is going down. With a little bit of luck 2015 could be a very good year for hedge funds.

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